Space for LLP in India

Till the introduction of the Limited Liability Partnership Act, 2008 (LLP Act), entrepreneurs running business on small/ medium scale had only two options as form of organization i.e. Partnership Firm or Private Limited Company. Now, with the introduction of the LLP Act third option is open for small scale business. But, we will really have to check whether there is any space for Limited Liability Partnership (LLP) in India. In order to address this question, we need to compare existing options available to entrepreneurs running business on small/medium scale basis. We also need to examine whether entrepreneurs running business on small/medium scale basis will opt for LLP. Let us look at following comparison. Sr No 1 Particulars Liability Partnership Every Partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner LLP
i A liability of partner is limited to the extent of his contribution. A Partner is personally liable for his own wrongful act i.e. act which is not authorized by LLP or for fraud on his part. 1. LLPs will be treated at par with Partnership firm for the purpose of Income Tax (30% flat + 3% Education Cess) 2. No surcharge on Income Tax 3. Profits will be taxed in the hands of LLP and not in the hands of Partners. There is no double taxation. 4. Minimum Alternate tax will not be applicable 5. Remuneration to Partners will be taxed as Income from Business or Profession ii It has perpetual succession. It means LLP has existence, no matter how many changes occur in membership.

Company Liability of shareholder is limited to the extent of his shareholding in the company.

Remark Advantage to LLP and Company

Taxation

1.

2. 3.

4.

5.

Income Tax (30% flat + 3% Education Cess) No surcharge on Income Tax Profits will be taxed in the hands of Partnership Firm and not in the hands of Partners. There is no double taxation. Minimum Alternate tax will not be applicable Remuneration to Partners will be taxed as Income from Business or Profession

1.

2.

3. 4.

Effective Tax including education cess and surcharge is 33.99% There is double taxation as Dividend Distribution Tax Applicable (17% approx). Minimum alternate tax is applicable Directors remuneration is taxable under the head Salary

Advantage to LLP and Partnership Firm

Perpetual Succession

It does not have perpetual succession as it depends on the will of the partner. Death of one partner dissolves partnership.

It has perpetual succession. It means Company has existence, no matter how many changes occur in membership.

Advantage to LLP and Company

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Investment

Legal Proceedings Bank Finance

Partnership firm is not allowed to invest in shares of other Company in Firms name. Only registered Partnership firm can sue Third Party or it can be sued. Bankers do not have sufficient protection.

LLP can invest in shares of other Company its name. LLP is a legal entity which can sue or can be sued. Bankers do not have sufficient protection.
iii

Company can invest in shares of other Company in its name. Company is a legal entity which can sue or can be sued. Bankers enjoy sufficient protection and prefers Private Limited Companyiv. There are lot many compliances required to be complied with under Companies Act. The Company is required to file its Financial Statements as at the financial year and for the financial year alongwith Auditors, directors report etc.. Plus there are many documents required to be filed with ROC. Majority of information is available at public Domain. There are restrictions for entering into contracts with Directors of the company or related parties. Complex process

Advantage to LLP and Company -

Advantage to Company

Compliances

Information available on Public Domain

There are minimum compliances required to be complied with under Partnership Act. Financial Statements i.e. Balance Sheet as at year end and profit and loss account for the year end is not required to be filed with Registrar of Firms. Hence this information is not available at public domain.

10

Related Party transactions

There is no restriction for entering into contracts with related parties.

There are minimum compliance required to complied with under LLP Act v Statement of Account and Solvency for the financial year is required to be filed with ROC within 30 days from the end of 6 months of each financial year. In addition viAnnual Return is required to be filed with ROC within 60 days from the end of Financial Year. And this information is available at Public Domain. There is no restriction for entering into contracts with related parties.

Advantage to LLP and Partnership Firm Advantage to Partnership Firm

Advantage to LLP and Partnership Firm Advantage to Partnership Firm

11

Liquidation

Simple process

Complex process

If we look at the above comparison, Private Limited Company has an edge over LLP with respect to Bank Finance. Where business is largely dependent on Bank Finance then Private Limited Company is the best option for running small and medium scale business. But the compliance and cost of running the company is high as compared to LLP. Small scale businesses which can be carried on with own funding can think of converting into LLP. All existing partnership firms can convert themselves into LLP. LLP has an advantage over partnership firm. [The only point of concern is financial information of LLP is available at public domain and liquidation would be a complex process.] Maintenance cost is almost same for Partnership and LLP. The main advantages are (1) limited liability of partners; (2) LLP can invest in shares of other company in its own name; and (3) perpetual succession. These three advantages over Partnership Firm can induce sincere entrepreneurs to convert into LLP or form LLP than forming traditional partnership firm. Further, Association of Persons (AOP) or any other un-registered entity can also go for LLP due to above advantages. Joint Venture Companies In the recent judgmentvii, Bombay High Court has put a question mark on enforceability of restrictive provisions of shareholders agreement in the Company form of organization. There can be provisions in shareholders agreement viz. transfer of shares, decision making process of shareholders and board etc. which can become matter of litigation. However there are no such

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restrictions in LLP act and hence it can be considered as suitable for joint venture [JV] entities/Special Purpose Vehicles [SPV]. However, the protection of minority provided in section 397 and 398 of the Companies Act is absent in LLP. Entities on Boundary Line of LLP As on today following business/ entities cannot get registered as LLP Non-banking financial businessviii Entities having foreign direct investment or making Overseas Direct Investmentix Multi-disciplinary firms of professionals like Chartered Accountants, Company Secretaries, Cost Accountants To allow the above business/ entities to form LLP suitable amendments are required in following Acts, Rules, Guidelines etc.. Reserve Bank of India Act, 1934 (RBI Act) Foreign Exchange Management Act, 1999 (FEMA Act) The Chartered Accountant Act, 1949, The Cost and Works Accountants Act, 1959, The Company Secretaries Act, 1980, the Code of Conduct/ Ethics, Guidelines under all the Actsx. Entities barred from LLP LLP is formed for carrying any business or trade with a view to profitxi. Hence LLP cannot be formed with Non-profit making objective. There is no provision under LLP Act for such kind of registration under it. Conclusion Hence, we can conclude that, LLP has a space by converting existing sincere partnership firms into LLP OR new entities can go for LLP rather than Partnership Firm. AOPs can also think of forming LLP instead of unregistered form of organization. Misfit Private limited Companies [who also do not have bank finance] can convert themselves into LLP. LLP can be convenient mode of business for JV/ SPV entities. Further if (1) RBI Act is amended, LLP can be formed with finance and investment object; (2) if FEMA provisions are amended FDI/ ODI/ ECB can be allowed in LLP; (3) if ICAI, ICSI and ICWAI acts are amended and if these institutes amend their code of conduct/ ethics, professionals like Chartered Accountants, Companies Secretaries and Cost Accountants can tie-up hands for providing services at one point contact under umbrella of LLP. Based on this discussion it appears that, there is certainly a space for LLP in India and this space can be extended to cover the uncovered areas of business e.g. multi-disciplinary professional firms.

Section 28 of the LLP Act Sub-section (2) of section 3 of LLP Act Sub-section (1) of section 3 of LLP Act iv Provision of filing charge, restriction on withdrawal of capital, requirement of statutory audit, restriction on related party transactions etc. offers protection to banks etc v Sub-section (3) of section 34 and sub-rule (4) of rule 24 of the Limited Liability Partnership Rules, 2009 vi Sub-section (1) of section 35 and sub-rule (1) of rule 25 of the Limited Liability Partnership Rules, 2009 vii Western Maharashtra Development Corp. Ltd v. Bajaj Auto Ltd viii RBI norms for NBFC requires an entity to be Company ix There are no norms for FDI/ ODI/ ECB in LLP x Government on 28.04.2010 has introduced in the Rajya Sabha three bills to enable Chartered Accountants, Company Secretaries and Cost Accountants to form LLP xi Clause (a) of sub-section (1) of section 11 of the LLP Act
ii iii

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